19th February 2012

On NEST Eggs: Retirement, Reluctant Consumers and Distributed Agency

As the arrangements that consolidated in the US and UK during the post-1945 period have all but unravelled, save those prevailing in the UK public sector which remain the focus of sharp political contestation, the world of occupational pensions continues to undergo significant transformations.  These changes are typically captured through a range of binaries – public and private, employer and employee, collective and individual – which provide a useful starting point for framing what is going on in this process. So, while state pensions persist and provide a limited income for the retired that is paid for out of taxation, occupational pensions in the private sector at least have increasingly become the responsibility of the individual employee as the collective and insurantial guarantees of employer-sponsored, defined-benefit (DB) ‘final salary’ schemes have melted away.

Providing for one’s own retirement in the future through a defined-contribution (DC) plans has, therefore, become the entrepreneurial financial consumption opportunity that contemporary workers have been expected to take-up over the last decade or so in the UK, and for somewhat longer in the US. This is not simply a matter of adding a tax-favoured contribution on a monthly basis to that made by one’s employer, and sitting back and waiting for the plan to deliver sufficient investment returns to fund retirement. Rather, under DC occupational pension plans, the individual worker is presented with a menu of mutual fund products by their plan provider, each tailored for different so-called ‘risk appetites’, and faces the uncertain prospect that their chosen fund(s) will yield investment returns that will be sufficient to meet their expectations of well-being and security in retirement. In short, in what is known by some in the US as DC Version 1.0, an individualisation of both responsibility and risk is at play that seems to turn on the agency of the financial consumer of retirement investment products.

However, even before the present financial crisis that did so much damage to pension pots – the cumulative value of UK DC portfolios fell by 25% between September 2007 and January 2009 – it was already being widely acknowledged that the DC pension world was populated by reluctant consumers. Not only were very large numbers simply rejecting this form of financial consumption on a range of grounds, but those who did make monthly contributions to DC plans very rarely exercised their choice between mutual funds and instead simply took the default investment option. In short, consumers seemed to have little hunger for DC pension plans, let alone being willing to consider their own appetites for investment risk.

Enter behavioural economics, a branch of the discipline that works with (rather than assuming away) the inertia, short-termism and choice-paralysing fears of economic agents, and which provides an array of prosthetics for would-be consumers of DC plans that go well beyond previous attempts to improve financial literacy. Multifarious policy and technical interventions are thus being presently made under DC Version 2.0 that promote widespread individual participation in plans through auto-enrolment techniques; increase the rate at which individuals make tax-favoured payments into plans through contribution escalator schemes; and cater for the decision-making and risk management deficiencies of individuals by providing default option funds with in-built ‘life-style’ and ‘target-date’ investment strategies. Perhaps the headline intervention of this kind in the UK is NEST (the National Employment Savings Trust), one of the outcomes of reforms in occupational pensions which were given shape by the Pension Commission’s wide-ranging review of 2004-5. Due to be phased in from later this year, 2012, NEST targets target around seven million low-to-moderate income and typically female workers who are not currently enrolled in a DC plan and do not make dedicated retirement investments.

How, then, might the developments of DC Version 2.0 and the pending introduction of NEST be thought of? Advocates and commentators tend to cast the ‘behavioural revolution’ in occupational pensions in positive terms, as it would appear to contain a paternalistic recognition that responsibility for retirement provision cannot and should not simply rest on the agency of consumers of pension plans and investment products. At first blush, these agents are now getting the help and support that they need and deserve in a partial reversal of processes of individualisation. And, perhaps, more broadly, the behavioural revolution is an indication of a turning of the tide, a move away from neo-liberal welfare reform.

But this view sits awkwardly with much recent literature on questions of economic agency in the social sciences, where an individual agent such as a consumer or investor is necessarily composed of or assembled through relations with discourses, models, tools, devices and so on. As Michel Callon put it in his contribution to Trevor Pinch and Richard Swedberg’s edited volume of 2008, Living in a Material World, the implication of this work is ‘to give up the study of individual agents’. The act of making a monthly contribution to a DC plan and investing for retirement is always a result of distributed agency, of the mobilization of human and non-human elements that Callon would have us call a ‘socio-technical agencement’. To be clear, when an entrepreneurial individual makes a carefully considered choice from the range of mutual funds on offer in their DC plan, or when somebody who has been auto-enrolled onto the NEST scheme plumps for the default fund which will automatically shift their investment portfolio into less risky assets as they near retirement, both are instances of distributed agency. The difference merely lies in the agent that each apparatus summons-up and places at its centre.

Moreover, the up-shot of re-thinking the behavioural revolution in terms of distributed agency is to re-open political space in which the dilemmas of occupational pensions can be reconsidered. By rendering the consumer of the retirement investment products of DC plans as the explicit problem to be solved through technical interventions such as auto-enrolment and default fund design, behavioural economics does not signal a paternalistic sea-change in occupational pension provision. Rather, it rearticulates the heterogeneous elements that, in relation, give DC plans their specific form and ordering power. The distributed agency of DC plans continues in the wake of the behavioural revolution to seek to secure the retirement of a population of responsibilised, risk-taking consumers of retirement investment products, and in doing so continues to expose them to the whims of future financial uncertainties.


Original image by Digital Sextant; used here under a Creative Commons licence.